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The Basics of Trade Secrets
Defining Trade Secrets
As trade secrets are comprised of secret information, there is no formal registry or government documentation of trade secrets in Canada. An upside of this is that, unlike intellectual property rights in the form of copyright, trademarks and patents, a trade secret is not time-limited and can survive indefinitely, if successfully kept secret. The aforementioned Coca-Cola™ recipe, for example, has been a closely guarded secret since as early as 1891. That’s as many as 130 years of protection. The 20-year monopoly afforded by a patent pales in comparison.
A trade secret can include almost any piece of valuable and technical business information if it is secret and if the holder of the secret has taken all reasonable measures to keep it secret. Consequently, successfully asserting the existence of a trade secret largely depends on whether the asserting party has taken meaningful steps to prevent the disclosure of the alleged secret.
For the most part, the Canadian trade secret regime is based on court-made law, which is also known as common law, although the Security of Information Act does address the fraudulent theft of trade secrets for the benefit of a foreign economic entity.
Canadian common law on trade secrets generally focuses on the unfulfilled duties owed by the parties stealing trade secrets to the parties from whom they have stolen and on the wrongful actions of parties receiving stolen trade secrets, rather than on the 'proprietary' nature of the information taken or the criminal nature of a 'theft'. However, in practice, trade secrets are often treated as property in much the same way that are patents or trademarks; each of these assets can be sold, licensed, bequeathed, and may be the subject of a trust.
Comparing Patent and Trade Secret Protection
If and when a trade secret is made public it generally ceases to be a trade secret and can be freely used by all. This is true whether it is made public as a result of independent creation by another (in the case of our Coca-Cola™ example, as a result of someone independently discovering the recipe), some act of the owner of the trade secret, or some wrongful action of an involved party. Where a court determines that a wrongful action was involved, compensation is often set at a level which could be understood to put the owner back in the position in which they would have been if the wrongful act had not occurred.
In many cases, secret processes and methods which may constitute trade secrets could also qualify for patent protection.
Patent protection is a definite property protection granted in exchange for the public disclosure of information. A patent grants its owner exclusive rights to the invention described therein, meaning a patent owner is entitled to exclude competitors from making, using, or otherwise commercially benefitting from the patented invention. Alternatively, the exclusive rights provided by a patent can be licensed to other parties to generate revenue. Patents are time-limited and only granted if an invention meets certain criteria including that the invention is novel and inventive, while trade secrets can be maintained indefinitely if kept secret and do not necessarily need to meet a standard of novelty.
Costs are associated with obtaining and maintaining both patent and trade secret rights. To obtain patent rights an owner of an invention must prepare and file an application, respond to any objections or notifications from the patent office, and pay periodic maintenance fees. To maintain trade secret protection, an owner must put in place systems, such as a series of contracts, to protect the secrecy of their trade secret and educate their employees and partners about obligations and expectations.
Patents and trade secrets are also valued differently and provide different benefits. Patent rights are a set of time-limited rights that are assumed to be valid and give the owner the ability to seek compensation for infringement. The amount of compensation for patent infringement is often calculated based on damages suffered or the amount of profit made by an infringer. Trade secrets are not limited by a predetermined amount of time, but violation of trade secrets rights is typically valued on the 'but for' analysis mentioned above and not considered theft of property.
In determining which protection route or scheme is best, an owner of a set of potentially valuable information must consider factors such as:
- whether that information would be eligible for patent protection;
- the relative value of the information as a patent-protected invention versus as a trade secret;
- the length of time during which exclusive use of the information would be beneficial;
- whether the remedies available at law for either patents or trade secrets would adequately address the harms resulting from infringement or misappropriation, respectively;
- what legal instruments or policies can be used to limit disclosure of the information; and, most importantly,
- whether the information can practically be kept secret and, if not, whether the risk of disclosure is an acceptable risk.
Maintaining Secrecy
Maintaining the secrecy of trade secrets is essential. How you maintain secrecy will likely depend on the type of information, whether it is needed on a day-to-day basis in your business, and how many people need to have access to it.
Broadly speaking, all employees and partners who will have access to the trade secrets should be made aware of the fact that this information is considered a trade secret, made aware of what steps they are expected to take to protect the confidential nature of the information, and asked to sign a contract agreeing to maintain the secret before being allowed access. These measures should not only clearly set out the secrecy obligations imposed but should also be presented in a manner that would be easily understood by any applicable party.
An important distinction is to be made between the confidential information an employee or partner obtains and the skills or experience that such people pick up over time. While the misuse of confidential information may breach a secrecy obligation, use of experience or skills acquired in the normal course of work is likely to be considered legally acceptable. Consequently, having business policies or training regimes that differentiate between confidential information and the general skills acquired by employees or partners can help reduce the risk of inadvertent disclosure of a trade secret or its misappropriation.
Other steps to take include securing any physical or electronic facilities in which the trade secrets will be available or used, marking documents as confidential if they contain the secret, and taking appropriate steps to secure electronic copies of the information. Also consider implementing measures that will eliminate common poor office practices, like leaving important documents out on one’s desk overnight or discussing trade secrets other than on a need-to-know basis.
Legal Protection for Trade Secrets
As mentioned above, the Canadian trade secret regime is largely a common law regime. As a result, there is no statutory definition of factors which will be considered in determining whether something is a trade secret, whether an action involves the misuse of a trade secret, and how to compensate an owner of a trade secret for its misuse.
Factors which have been considered by the courts include:
- the extent to which the secret adds to existing industry knowledge;
- the measures which had been taken to maintain secrecy;
- the value of the information;
- the cost in money or time of creating or developing the information;
- the ease with which the information could be acquired or developed by others independently;
- the degree to which the owner regards and treats the information as confidential;
- the degree to which the recipient regards and treats the information as confidential;
- whether the recipient ought to have known that the information was confidential; and
- whether misuse of the information resulted in detriment to the owner.
At minimum, in order for a trade secret to be protected, the information must have commercial value, the information must also be secret and been subject to reasonable measures by the business to ensure that it remains secret.
Remedies for misuse of trade secrets could include court orders that the information no longer be used, compensation for lost opportunities, or other compensation. It should be noted that a delay in seeking to stop a misuser of a trade secret could result in some remedies not being available.
The United-States-Mexico-Canada Agreement (USMCA) on Trade Secrets
The United States-Mexico-Canada Agreement (USMCA) is the successor to the North American Free Trade Agreement (NAFTA). It entered into force on July 1, 2020 for its three parties and included several provisions directed to strengthening North American trade secret protection and commercialization.
The USMCA aims to ensure that persons within the United States, Mexico, and Canada have the legal means to prevent trade secrets lawfully in their control from being disclosed to, acquired by, or used by others without their consent in a manner contrary to honest commercial practices. The USMCA provides that its three ratifying parties shall have civil judicial procedures that offer wronged parties the opportunity for redress, as well as criminal procedures and penalties for unauthorized and willful misappropriation of a trade secret.
Civil judicial procedures would not be limited by a finite duration and, instead, be available so long as an intangible asset continues to qualify as a trade secret. In contrast, criminal enforcement would be directed to cases where misappropriation affords a commercial advantage or financial gain, is related to a product or service in national or international commerce, or where the misappropriation is done with the intention to injure the lawful owner of the trade secret.
Civil judicial authorities shall also have the authority to order specific procedures to protect the confidentiality of any trade secret or alleged trade secrets and to impose sanctions on persons subject to such proceedings who violate protection orders. Judicial authorities also shall not disclose any information asserted to be a trade secret without first consulting the asserting person about their interests in keeping the information confidential.
Civil remedies discussed in the USMCA for the misappropriation of trade secrets include injunctive relief and damages. The quantum of damages is to be adequate to compensate the wronged person for the injury suffered because of the misappropriation and, if appropriate, the corresponding enforcement proceedings.
Lastly, no party to the USMCA shall discourage or impede the voluntary licensing of trade secrets by imposing excessive or discriminatory conditions on those licenses or conditions that dilute trade secret value.
Uses of Trade Secrets
Inventors can maintain the confidentiality of their invention as a trade secret before applying for a patent. In addition, trade secrets can be a cost-effective way for inventors to protect their innovations instead of a patent where the innovation has a short life span or is difficult to reverse engineer. Trade secrets can further be used to protect valuable confidential information (e.g., consumer data, recipes and market research information) that is not generally protected by other forms of IP.
Conclusion
Deciding how to protect a market advantage which is based on certain information is often an exercise in choosing between patent and trade secret protection. If you have chosen to protect your information as a trade secret, several proactive steps should be taken to maintain the secrecy of your information. If you believe that your secret has been misused, it is important to act in a timely manner.
If you would like our help to develop your trade secrets strategy or to work with us to enforce your trade secret rights against another, contact us now for a complimentary and confidential initial telephone appointment.
